National Bank of Ukraine

Speech by NBU Governor Yakiv Smolii at a press briefing on monetary policy
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Dear colleagues,


Please be informed that the NBU Board has decided to maintain its key policy rate at 18% per annum.


We believe that the current and forecast monetary conditions are sufficiently tight to bring inflation to its medium-term target of 5% in 2020.


What inflation developments followed the last key policy rate decision?


In September 2018, consumer price inflation reached 8.9% yoy, having exceeded both the upper limit of the target range (6.5% ± 2 pp set for the end of Q3 2018) and the July projections of the NBU (8.3%).


The moderate drop in inflation compared with previous months was due to slower growth in food prices, driven by an increase in domestic and imported supply of food products, as well as lower global food prices.


At the same time, the underlying inflationary pressure remains strong. This is reflected in the sustained high reading of core inflation (8.7% yoy in September), which is above the NBU’s July projections.


      First, domestic demand remaining high and further growth in production costs, including labor costs, put an upward pressure on prices.

In Q2, the growth in the final consumption expenditure accelerated to 5.6% yoy. In particular, there was a sizeable increase in household spending on clothing and footwear, home goods, and transportation.

In addition, investment demand has been growing rapidly for the third consecutive year. The gross fixed capital formation rose by 14.2% yoy in Q2, supported by high business expectations.

The sustained strong demand is also reflected in the relatively high growth in retail trade and transportation, which has added 5.5% and 4.8% yoy respectively over January–September. Growth in imports of consumer goods also accelerated markedly.

Rapid wage growth and social payments – particularly, pensions – supported growth in demand. In August, the average nominal wage in Ukraine was 26% above the previous year’s level. Along with that, as seen in the quarterly business outlook surveys conducted by the NBU, more than half of companies continue to state that labor costs have a significant influence on producer prices.


      Second, the hryvnia weakening against the US dollar in July–August influenced prices of some goods, especially imported ones.


      Third, the rapid growth in global crude oil prices seen in the past months passed through to fuel prices and contributed to higher cost of other goods and services.

In September alone, prices for Brent oil rose by 8%. Today they are 43% higher than a year ago.  Amid the hryvnia depreciation in the past few months, this made domestic fuel prices increase further to 23% in September.

This boosted growth in prices for those goods and services cost of which strongly depends on fuel prices. For example, prices for road transportation services rose by one quarter in September.


The above factors and the approaching presidential and parliamentary elections to take place next year affected the inflation expectations. In particular, household expectations deteriorated. Businesses, banks, and financial analysts maintain high inflation expectations, at levels much above the NBU’s inflation targets.


What are the future inflation developments?


In short, inflation will decline, although it will take longer than expected to meet the target.


Having considered the above factors and the anticipated rise in administered prices, the NBU has revised its 2018 inflation forecast upwards, from 8.9% to 10.1%.


The increase in consumer demand, rapid wage growth, and the recent jump of crude oil prices will continue to impact consumer price inflation next year. This will keep inflation above the target range for longer than expected.


Inflation is projected to decline to 6.3% as of the end of 2019. It will enter the target range in Q1 2020 and reach the medium-term target of 5.0% at the end of 2020.


The slowdown in inflation will be mostly driven by the tight monetary conditions, which the NBU Board believes have formed as a result of the previous key policy rate hikes. Such conditions will ensure the balance between the need to reduce inflation and bring it to the target and the need to maintain the economic growth.


At the same time, other factors will enhance the tight monetary policy stance. Banks are expected to continue raising interest rates on hryvnia household deposits due to shrinking bank liquidity surplus and in response to the previous key policy rate hikes. This will incentivize Ukrainians to shift from spending towards more saving.


Moreover, next year, labor migration from Ukraine will not put such a significant upward pressure on wages as in the previous two years.


Inflation will also be reined in by prudent fiscal policy and the moderate pace of imported inflation on the back of reasonably low exchange rate volatility.


Among other things, exchange rate and inflation expectations are expected to benefit from positive signs that some progress has been achieved in ensuring cooperation with official lenders, in particular entering into a new arrangement with the IMF that will carry over for the next year.


The NBU has also scheduled revisions of other macroeconomic forecasts


It has made no change to its economic growth projections for 2018–2020. As before, the central bank expects that economic growth will accelerate to 3.4% in the current year. The growth will be mainly propped up by private consumption, as household income increases further. The investment activity of companies will also remain rather buoyant.


In 2019, real GDP growth will decelerate to 2.5%, due to a slowdown in the global economy, a fall in global commodity prices, tight fiscal policy resulting from the need to repay large volumes of public debt, as well as tight monetary conditions required to bring inflation back to its target.


In 2020, economic growth will speed up to 2.9%. The growth will be fueled by a mostly gradual easing in monetary policy, which will become possible after inflation stabilizes at a level close to the target, as well as by the economy’s greater investment attractiveness.


External accounts will be in equilibrium in 2019 – 2020. The current account deficit will continue to hover between 2.5% and 3% of GDP, and will be offset by official financing and private capital inflows.


The NBU’s macroeconomic forecast is based on the assumption that Ukraine will continue to cooperate with the International Monetary Fund under a new Stand-By Arrangement.


The new Stand-By Arrangement can definitely be regarded as a positive development for Ukraine.


First, new loans from the IMF, and related financing from other Ukrainian partners, will boost the country’s macrofinancial stability.


Second, the new arrangement is an anchor for state policy, and will therefore lay the foundation for an improvement in expectations and Ukraine’s access to the global capital markets.


The NBU sees a further rise in consumer demand and a deterioration in inflation expectations as the main risks that the said macroeconomic forecast may not materialize, including that inflation may not meet its 2020 target.


First, inflation expectations could continue to rise, driven by a new political cycle.


Second, external conditions could deteriorate.

      A more rapid slowdown in the global economy, including in the economies of Ukraine’s main trading partners, is one of the main external risks.

The IMF has recently revised downward its global economic growth projections for the coming years. Its potential for growth is hampered by the low capital investment and depressed productivity growth that persisted for a long time after the global financial crisis. In addition, the disparity between the rates of economic growth in developed and developing economies is rising.

The IMF sees an escalation of trade wars, geopolitical tensions in the Middle East, a deterioration in financial conditions, and higher energy prices as threats to the global economy.


      A decline in global commodity prices is another important external risk for Ukraine.

Escalating trade wars are increasing trade regionalization and putting downward pressure on commodity prices. In particular, one should follow developments on the steel market. In spite of there being a global surfeit of steel, the supply of steel is expected to grow further. In 2019 – 2020, new foundries are scheduled to be commissioned in Middle Eastern, African, and Southern and Central American countries. This could push down steel prices more than is envisaged in the NBU’s current forecast.


      A further rise in global energy prices is yet another risk for Ukraine.

The global oil market is expected to face oil shortages at the end of the current year, resulting from the second round of sanctions imposed on Iran, and a seasonal increase in oil consumption.


      One should also bear in mind potential capital outflow from developing economies, including Ukraine, due to the central banks of leading countries tightening their monetary policies at a fast clip.

In particular, the NBU will keep an eye on inflationary pressures in the United States. If inflationary pressures rise, the Fed could raise its interest rate more rapidly. Resulting increases in the yields of U.S. long-term government securities will make risky financial assets, including the debt instruments issued by developing economies, less attractive to investors.


Why did the Board decide not to change the key policy rate?


Taking into account an updated macroeconomic forecast and the assessments of the above risks, the NBU Board believes that existing monetary conditions are tight enough to reduce inflation in the mid-term.


However, the NBU will continue to keep a close watch on factors of underlying inflationary pressures, in particular on consumer demand, inflation expectations and any progress achieved in ensuring cooperation with international official lenders.


What will the NBU’s monetary policy stance be in future?


If inflation pressures do not ease or even build up, the central bank could raise the key policy rate again.



To learn more about a new macroeconomic forecast, please see the Inflation Report that will be published on 1 November 2018.


A summary of the discussion by Monetary Policy Committee members that preceded this decision will be published on 5 November.


The next meeting of the NBU Board on monetary policy issues will be held on 13 December 2018.


Thank you for your attention!



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